Walking away from a sales contract is a sticky process

Elizabeth RazziThe Washington Post

If you thought buying a new home was expensive, wait until you see how much it costs you to back out of the deal.

Some buyers have compelling reasons to want out of a home sale agreement. How can you buy if you no longer qualify for a mortgage, or if you haven't been able to sell your old home? Who wouldn't walk away from a deal that's worth $50,000 or $100,000 less than when the contract was signed?

With appraised values coming in below the contract price, buyers have to come up with more cash to follow through on such a deal. Sometimes walking away from a purchase is the least painful, most financially prudent option.

That's why we're seeing such cancellations reach one-third of sales. Toll Brothers saw 28 percent of buyers cancel in the first quarter of this year, according to financial statements. Centex Homes' cancellation rate was 33 percent in the third quarter of 2007, according to its most recent report to investors. NVR Inc., which builds NVHomes and Ryan Homes, experienced a 37 percent cancellation rate in the fourth quarter. These are just a few examples; the trend cuts across the industry.

So what happens to the tens of thousands of dollars those buyers paid as deposits? As you might imagine, builders don't relinquish that money gladly.

Builders typically ask for 10 percent of the contract price as a deposit, said real estate lawyer Harvey Jacobs, owner of Stress-Free Settlements. "If you can get away with paying less, great," he said. "But they ask for 10 percent." Builders also typically ask for additional cash to cover the price of options and upgrades.

In addition to the cash deposit, builders frequently ask buyers to sign a promissory note for an equal amount of money, Jacobs said. That note comes into play only at closing, when it becomes payable out of the buyer's mortgage. It's a liability that lies dormant but that serves to double the amount of cash the buyer has at stake if he pulls out of the deal.

Those promissory notes are builders' attempts to stem that wave of cancellations. If buyers are willing to forfeit $50,000 to walk away from a $500,000 home sale, maybe being on the hook for $100,000 would keep them in the deal. "I'm definitely seeing more letters saying, 'We're going to enforce your promissory note if you don't close,'" Jacobs said.

What's more worrisome, Jacobs said, is that many people don't even realize they have signed such a note, one page among the many included in a sales contract.

What do the home builders have to say about promissory notes, or about deposits in general? Nothing. The first opportunity you have to read a builder's sales contract and the accompanying documents (which can be just as important -- and binding -- as the contract itself) could very well be when you are being asked to sign them.

Never sign a contract while you're sitting in the sales office. When you're writing a deposit check for tens of thousands of dollars, and signing a contract worth hundreds of thousands, you really deserve a few days to have your own real estate lawyer look at the specifics.

Those lawyers are seeing a steady stream of would-have-been buyers looking for help getting their deposits back.

Arthur Kahn, a partner with the Brincefield, Hartnett & Kahn law firm in Alexandria, Va., said the procession started in fall 2006.

Sometimes, there are technical aspects to the contract that could become a convincing argument for a refund, he said. For example, he cited a "relatively arcane and complex statute," the Interstate Land Sales Full Disclosure Act. With some exceptions, it requires developers to register subdivisions of 100 lots or more with the Department of Housing and Urban Development. If the development is covered under that law, buyers are supposed to be given a disclosure document, called a "property report," before they sign a purchase contract.

Registration "is a time-consuming process, and you're not allowed to market until HUD has approved the registration of the project," Kahn said. Especially during the real estate boom, he said, some developers didn't want the delay. If the developer should have registered with HUD or should have given the buyer the property report but failed to do so, that could be a route out of the deal and toward a refund.

There are other avenues lawyers might take to recover deposits. For example, contracts often allow builders as long as two years to complete construction. But, especially with condo projects, some deliveries have been closing in on that two-year deadline. No rational buyer wants to pay 2006 prices for a condo now. These deals are ripe for cancellation. Your argument for getting back the deposit may focus on the details about when that two-year clock started ticking, and when the home qualified for an occupancy permit.